EPRG full form stands as Ethnocentric, Polycentric, Regiocentric, and Geocentric. It is a framework created by Howard V Perlmutter, Jerry Wind and Douglas in 1969. The EPRG Framework helps organization choose which approach is most suitable for it to achieve successful results in countries abroad. When organizations decide to go overseas in search of market expansion they need to adopt one of the styles as in ethnocentric, polycentric, regiocentric, geocentric. EPRG model often is also called EPG Model in International Business.

Organizations choose strategies based on what suits them most, therefore making them differently oriented. As a result, costs and profits are generated in different ways, depending on the mentioned kind of orientation. Therefore the identification of the right orientation is essential. For example, it is important that different activities of the organization are consistent between headquarter and SBUs situated in other part of world at various stages. It is also important that the culture of organization, its marketing strategy, financial strategy, operational strategy is consistent. Only then, the organization can operate efficiently in the market. Let us look at the four approaches as follows:

Ethnocentric: means to apply one’s own culture in social science and anthropology. Japan has a reputation for being ethnocentric. Ethnocentric comes from ethnicity which means belonging to a social group that has a common national or cultural tradition. Ethnicity as a frame of reference is used to judge other cultures, practices, behaviour, beliefs and people, instead of using the standards of the particular culture involved. Since this judgment is often negative, some people also use the term to refer to the belief that one’s culture is superior to, or more correct or normal than, all others especially regarding the distinctions that define each ethnicity’s cultural identity, such as language, behaviour and customs.

There is no change in terms of product specifications, price, promotion, and other aspects and is same as compared to the native market.

Typical examples of ethnocentric companies are Japanese companies such as Panasonic, Sony and Hitachi. In Ethnocentric Approach, the key positions in the organization are filled with the employees of the parent country. All the managerial decisions viz. Mission, vision, objectives are formulated by the MNC’s at their headquarters, and the same is to be followed by the host company. It is based on the rationale that, the staffs of the parent country is best over the others. In the host countries in top position the organization appreciates having parent country employees at top.

The head office is given more importance as compared to the overseas subsidiaries or offices situated in the international markets.  These companies ignore the potent opportunities outside the home country and they are referred to as domestic companies.

The advantages of ethnocentric approach can be as follows:

1. Better coordination between the host and the parent company.
2. The culture of the parent company can be easily transferred to the subsidiary company, thereby infusing beliefs and practices into the foreign country this also help in controlling the subsidiary effectively.
3. The parent company can have a close watch on the operations of the subsidiary.

Polycentric Orientation: Polycentric approach of business can be defined as host country orientation. Here the host country’s customs, behaviour, culture, language is considered while doing business. Under a polycentric perspective, a company’s management team believes that it is better to adopt host country’s culture to befriend the customers, suppliers and government. In Polycentric orientation organizations see host country’s unique and exclusive conduct because businesses are best run locally as per local culture. This approach lays a strong groundwork because every subsidiary develops its unique marketing and business strategies for success and the country’s domestic market is given equal importance. This approach is best suited for the developing countries in which certain constraints on the front of finance, political, and cultural front are experienced.

The best example of polycentric organization is McDonald. The familiar offerings in their restaurants in the United States may be somewhat less familiar if you venture abroad. In India, where many people do not eat beef, McDonald’s offers the McAloo Tikki, a vegetable patty with characteristic Indian spices. European McDonald’s often serve wine in addition to soft drinks. Customers in the Netherlands can order a Stroopwafel McFlurry, a dessert that mixes in a popular Dutch cookie treat. The product offerings are fine-tuned to individual country or regional tastes, polycentric advertising strategies are equally diverse, relying on music, spokespeople, language and cultural references that are familiar to the local population.

The Google search engine is well-known for its clever “Doodles” the images and text that appear almost daily to celebrate a particular person or event in a country.  Google Doodles are made as per polycentric approach. The doodles announce events around the world; special doodles are designed for Olympics, Soccer World Cup, and Cricket World Cup etc.

The advantages of polycentric approach are as follows:

1. The difficulty in the adjustment of expatriates from the parent country gets removed.
2. The hiring of locals or the nationals of the host country is comparatively less expensive. The morale of the local staff increases.
3. Better productivity due to better knowledge about the host market; the career opportunities for the nationals of the host country increases.
4. Better government support.

Regiocentric Orientation: is an approach adopted by a firm wherein it adopts a marketing strategy across a group of countries, which have been grouped on the basis of their market characteristics; i.e., the market characteristics of these countries would be more or less similar. The company which follows this approach of framework studies the similarities in markets to design strategies. The management of the company records the economic, social, cultural, and political similarities between the native areas of the overseas region to sell its products and services to potential customers. It is worth noting that the cultural and regional identity of India, Pakistan, and Bangladesh is quite similar whereas Norway and Spain that both falls in Europe are very different in terms of culture, climate, and transport amongst other aspects.

Coca-Cola and Pepsi are regiocentric companies. Regiocentric strategy assumes that all countries of the region can be regarded as a single market.

HSBC is one of the largest banking and financial services organizations in the world, with well-established Businesses in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. They use a regiocentric approach. Organization group countries on the basis of their market characteristics; i.e., the market characteristics of these countries would be more or less similar.

Some of the advantages of regiocentric approach are as follows:

1. Helps cultural fit. When organizations hire the managers from the same region as that of the host country may not encounter any problem with respect to the culture and the language followed there. It costs less in hiring the natives of the host country.
2. The managers work well in all the neighbouring countries within the geographic region of the business.
3. The nationals of host country can influence the decision of managers at headquarters with respect to the entire region.

Geocentric Orientation: is practiced when an organisation does not organise its strategies based on country or regions. Geocentric firms adopt an approach whereby they have a global mind-set. They view the whole world as their market and seek to identify global needs and wants and create products and services. The companies following the geocentric approach of the EPRG Framework are truly the global players. They think global and act global. Their HR policies for staffing and job position approach to staffing assigns job positions to any person best suited for the position, regardless of the employee’s background, culture or country of origin. These organizations understand costing in hiring in terms of immigration policies; costs of worker relocation and diversity management create pressure on HR management.

McDonalds is a global company which follows Geocentric approach because it perceives world as a single market and tries to offer low cost products and services everyone. Even MTV (24 hours music channel) is a geocentric organization.  The Geocentric approach does not connect nationality with the factor of dominance.

Advantages of geocentric orientation are as follows:

1. MNC’s can develop a pool of senior executives with international experiences and contacts across the borders in the world. The expertise of each manager can be used for the accomplishment organization’s objective as a whole.
2. Reduction in resentment, i.e. the sense of unfair treatment reduces.
3. Shared learning, the employees, will learn from each other’s experiences.

A subsidiary is a company that is owned or controlled by another company, which is called the parent company, or holding company.  The subsidiary can be a company, a corporation, or limited liability company. In some cases it is a government or state-owned enterprise, for example, Air India is the flag carrier airline of India, headquartered at New Delhi. It is owned by Air India Limited, a government-owned enterprise, and operates a fleet of Airbus and Boeing aircraft serving 102 domestic and international destinations. Another example is of Titan was established in 1984 as a joint venture between the Tata Group and Tamilnadu Industrial Development Corporation (TIDCO), commenced its operations in 1984 under the name Titan Watches Limited. Titan is the fifth largest integrated own brand watch manufacturer in the world. Over the last three decades, Titan has expanded into underpenetrated markets and created lifestyle brands across different product categories.

In international business management, multinational, international or global corporations can venture into new markets by way of subsidiaries which are like branches of the parent companies but which are semi-autonomous (acting independently to some extent). The subsidiary is a company registered on its own but it is owned and controlled by the mother company.

The relationship between the parent corporation and the subsidiary is to alleviate the possible remoteness of the large global organization from the immediate business environment. The subsidiary makes decisions that affect the immediate environment in which they operate; they usually fine-tune their operations, services and products to the political, economic, social, technological, ecological and legal factors (PESTLE) prevailing in their local markets. The strategic management of the global body may not be privy to such factors and so the decisions they make are likely to lose touch with the reality on the ground. For example, a number of African states had problems with the Coca-Cola Taste the Feeling advert because it was seen to fly in the face of African moral standards because it had long acts of people kissing and this was seen as inappropriate. With such kind of challenges, the subsidiaries are best suited to make decisions on such matters or to offer advice to the mother corporation.

Large organizations form subsidiaries to enter new markets, negotiate better terms with suppliers, or bypass tariffs on imports. This approach also allows them to create job opportunities in developing countries. Subsidiaries may have a different legal status than that of the holding company, and therefore, they may enjoy certain tax advantages.

Subsidiaries are a common feature of corporate life and most multinational corporations organize their operations in this way. Their global presence is felt through subsidiaries in different parts of world.  Berkshire Hathaway Inc. which is a giant conglomerate and one of the world’s largest companies organizes its businesses globally with multiple subsidiaries.

POSCO India Private Limited is an Indian subsidiary of Korean conglomerate POSCO. Its parent company POSCO signed a memorandum of understanding in June 2005 with the state government of Odisha to construct a $12 billion steel plant. Hindustan Unilever Limited is a subsidiary of Unilever, a British-Dutch company. Its products include foods, beverages, cleaning agents, personal care products, water purifiers and other fast-moving consumer goods. HUL is India’s leading FMCG.

Each type of business entity falls under different regulations and has a distinct role. Business units operate independently but report to the company’s headquarters. They are big enough to have HR departments, sales teams and other support functions. An organization may have regional, national or global business units that can be further divided into several categories, depending on their role.

The primary difference between business units and subsidiary units lies in their ownership. A business unit is a department or functional area within an organization. A subsidiary is owned or controlled by another company and may have its own business units. Each business entity is subject to different regulations and tax laws and has distinct characteristics. Subsidiaries are fully or partially controlled by another organization, which is referred to as the parent or holding company. A parent company must own at least 51 per cent of the shares in a subsidiary.

When a corporation purchases less than half of another company’s stock, the latter becomes an affiliate company. An affiliated company is a relationship between companies with either one owning the other as a minority shareholder or multiple companies being owned by a third party. Companies are affiliated when one company is a minority shareholder of another. In most cases, the parent company will own less than a 50% interest in its affiliated company. For example, Bank of America has many different affiliated companies including Bank of America, U.S. Trust, Landsafe, Balboa, and Merrill Lynch.

What are the Attributes of a Subsidiary?

1. A subsidiary operates as a separate and distinct corporation from its parent company.  This benefits the company for the purposes of taxation, regulation, and liability. The subsidiary can sue and be sued separately from its parent. Its obligations are also typically its own and are not usually a liability of the parent company.
2. The minimum level of ownership of 51% guarantees the parent company the necessary votes to configure the subsidiary’s board. This allows the parent to exercise control in company decision-making.
3. Parent sub-companies need not operate in the same location, nor be in the same line of business. Subsidiaries may also have their own sub-companies; the line of succession forms a corporate group with varying degrees of ownership.
4. The parent company can be larger or smaller than the subsidiary. It need not be more powerful than the subsidiary. The size of the firm or employees does not decide the relationship. The only control over ownership is the key factor.
5. Also, the location or type of business of both companies does not matter.  They may or may not be in the same location or same business line.
6. The parent company has to register with the state registrar of the state in which the company operates. The ownership and stake details are to be defined during this process.

Advantages:

Tax benefits

A parent company can substantially reduce tax liability through deductions allowed by the state. For parent companies with multiple subsidiaries, the income liability from gains made by one subsidiary can often be counterbalance by losses in another.

Risk reduction

The parent-subsidiary framework mitigates risk because it creates a separation of legal entities. Losses incurred by a subsidiary do not readily transfer to the parent. In case of bankruptcy, however, the subsidiary’s obligations may be assigned to the parent if it can be proven that the parent and subsidiary are legally or effectively one and the same.

Increased efficiencies and diversification

In some cases, creating subsidiary silos enables the parent company to achieve greater operational efficiency, by splitting a large company into smaller, more easily manageable companies.

Types of subsidiaries

Wholly owned subsidiary

When corporation purchases 100 per cent of the stock of another company, the subsidiary is “wholly-owned.” A wholly-owned subsidiary company is not a merger.

A popular example of a wholly owned subsidiary system is Volkswagen AG, which wholly owns Volkswagen Group of America, Inc. and its distinguished brands – Audi, Bentley, Bugatti, Lamborghini (wholly owned by Audi AG), and Volkswagen.

Limited Liability Companies

Subsidiaries can be limited liability companies (LLC); it is a business structure in the United States whereby the owners are not personally liable for the company’s debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.  Facebook has sub companies such as Instagram, LLC – a photo-sharing site acquired by Facebook in April 2012 for approximately US$1B in cash and stock. Instagram remains separate in its operational management.

Management of subsidiaries

Operation

Normally, the parent company just oversees the operations of the subsidiary company. However, in certain cases, the parent company may supervise day to day operations of a subsidiary company.

Subsidiaries are separate legal entities. They have their own concerns regarding the handling of taxation, regulations and liabilities. Subsidiary companies can sue and be sued separate from the parent company. The obligations of a subsidiary may or may not be obligations of the parent company. One of these companies can be undergoing legal proceedings, bankruptcy, and tax delinquency or be under investigation without affecting other companies directly. Though affecting public image is altogether an intangible thing. Hence, forming a subsidiary protects the assets from each other’s liabilities.

The Intellectual properties remain with the subsidiaries:

The copyrights, patents, trademarks etc. of a subsidiary company stay with them until the parent shuts it down.

Voting rights

Since holding company controls the subsidiary through ownership of shares, it gets voting rights to determine the board of directors.

Accounting and Financials

Subsidiaries being an independent identity and they prepare their own financial statements. They have their own bank accounts, assets, liabilities, etc. All the transactions between the parent company and subsidiary company are to be recorded. Further, these statements are sent to the parent company.

Consolidated Accounting

The parent company aggregates and consolidates subsidiary’s transactions into its own books of accounts. According to the Securities and Exchange Commission (SEC), public limited companies should consolidate all majorly owned firms or subsidiaries to show true and fair value. The figures in profit and loss statement or balance sheet include values for both parent and subsidiary company. For example, aggregate sales, aggregate purchase, aggregated assets and liabilities.

For example, Tata Motor’s prepares consolidated financial statements including Tata Motors Limited and its subsidiaries such Jaguar Land Rover, Tata Daewoo, Tata Technologies, Tata Hispano, Tata Hitachi Construction Machineries etc. These subsidiaries are entities controlled by Tata Motors.  

When a parent company does not consolidate accounts of the affiliated company, it registers the value of the stake in such an affiliate company as an asset in the balance sheet.

Unconsolidated Accounting

In rare cases, the SEC (Securities and Exchange Commission) allows this option. That is to say, when a parent company does not hold a significant stake, a subsidiary company is undergoing bankruptcy, major liquidations crises, etc.

Staffing practices

In many MNCs interdependence has increased the need for cross-border coordination in staffing. International Human Resource Practices enhance the coordination capability across national borders. It is found that the degree of interdependence is related to the level of international experience of staff employed in subsidiaries. The training and development varies depending on employee culture and standard, cross-cultural management teams are managed well on the basis of variety of employee evaluation and reward method.